Alibaba Cloud has become the dominant cloud provider in China and nearing profitability, but future growth will largely revolve around moving up the services stack for artificial intelligence and analytics workloads.
The upshot from Alibaba Group's investor sessions this week is the e-commerce giant is surging as shopping habits chang,e and it has a portfolio that touches commerce from many angles. Its Alibaba Cloud unit is what Amazon Web Services is to Amazon.
And like AWS, Alibaba is starting to see Alibaba Cloud as a future profit engine. Alibaba CFO Maggie Wu said that the cloud unit will turn profitable within fiscal 2021.
"The company expects cloud to become EBITA profitable in fiscal 2021, and is targeting AWS-like profitability long term," said Oppenheimer analyst Jason Helfstein in a research note. "Moreover, ARPU is growing significantly faster than customers, implying customers are moving 'up the stack.'"
Alibaba CEO Yong Zhang said Alibaba Cloud is poised for strong growth. The cloud unit is growing at a 60% clip with a strategic plan that revolves around targeting industries and new workloads. Alibaba Cloud has more than three million paying enterprises, represents 8% of Alibaba's total sales, and is hitting a $7 billion annual revenue run rate.
We are redefining cloud computing to integrate data with commerce and business use cases so as to create real value for the real economy and industry verticals. Our cloud computing and data intelligence business has already achieved considerable scale, but we still regard ourselves to be in the nascent stage of the global cloud era. We believe this is an industry-wide opportunity across all sectors, the kind of opportunity that comes only once in a generation.
Alibaba Cloud has also benefited from demand amid remote work during the COVID-19 pandemic in China. The company has bundled Alibaba Cloud and DingTalk, its cloud office collaboration platform.
DingTalk is just one part of a broader stack for Alibaba Cloud. In an investor presentation, the company outlined its stack and ability to target industries such as public services, retail, manufacturing, and logistics.
In Gartner's Magic Quadrant for cloud infrastructure as a service, the firm noted that Alibaba Cloud has high satisfaction, but faces expansion issues abroad and increasing competition from Tencent Cloud.
Tencent Cloud is used by Chinese multinationals to expand outside the country. For instance, Tencent Cloud, which has more global IaaS market share than Oracle and IBM, has availability zones in areas such as Australia, Brazil, Canada, Japan, and even Russia, according to Gartner.
However, Alibaba Cloud is the cloud giant for now. Gartner said:
Gartner clients frequently comment about their satisfaction with Alibaba Cloud's data analytics and database solutions. Clients often use such data analytics capabilities to improve the ability to sell in digital channels, which is particularly attractive in the retail and fast-moving consumer goods (FMCG) markets.
But it's unclear whether Alibaba Cloud can expand beyond China. "Alibaba remains a mostly China-focused vendor, with limited customer adoption elsewhere. It is especially true in Europe, India, and North America, where geopolitical headwinds create a challenging barrier to adoption," said Gartner.
Bottom line: Alibaba Cloud's strategic plan is sound and China trails the US by a wide margin in public cloud adoption. As a result, Alibaba Cloud is going to have a lot of revenue runway even if it doesn't expand beyond China.